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STRATEGIC MANAGEMENT (TENTH EDITION)

(BY John A pearce II , Richard B Robinson, Jr & Amita Mital)

THE RAJA OF STEELLakshmi Mittal is building the biggest steel company on earth. What will he do when the glut comes?

The Dabrowa Gornicza steel plant near Katowice, poland, is a cathedral of Soviet-era rust belt industry.

An enormous building, lit by gray skylights and navigated by catwalks, houses a hot rolling mill nearly a

kilometer long. The heart of the operation is a giant conveyor belt that trundles steel bars, glowing bright

orange with heat. Sparks fly and steam rises when the bars hit rollers that squeeze the metal into I-beams

and rails. The air is filled with the groans of machines.

This part of the world is littered with dinosaur steel plants like Dabrowa. Such Communist relics looked

doomed to extinction not long ago, but under all that corroded metal, Lakshmi N. Mittal spied gold. The

Indian-born steel baron has been building his own Jurassic Park, picking up five plants in Poland and the

Czech Republic in just two years, to add to a collection that spans four continents.

Nobody outside the steel industry paid much attention to Mittal's sad sack of properties until October.

That's when Mittal Steel announced a $4.5 billion deal to buy International Steel Group (ISG), a package

of five once-bankrupt steel companies assembled by U.S. Workout specialist Wilbur L. Ross Jr. The share

price of Ispat International, apublicly traded Mittal company , jumped 27% on the announcement. Ispat

will be merged with Mittal's private holding company, LNM Holdings, to form Mittal steel Co., which will

take over ISG. Assuming the transaction is finalized on schedule in early 2005, Mittal will stand at the

helm of the world's No.1 steel company, annual shipments of 52 million metric tons, some $32 billion in

annual sales, and 2004 pro forma profits in excess of $6.8 billion. Guy Dolle, the chief executive of

Luxembourg-based Arcelor, dashed off a congratulatory e-mail as soon as he got wind of the deal a

magnanimous gesture considering Mittal had just deposed him as steel king. Mittal has a vision for the

industry that goes back a long way, well before the majority of his peers, says Dolle.That vision, in one word, is consolidation. The word steel connotes strength and permanence, but the

companies that make everything from construction beams to color-coated sheets for appliances and

rustproof strips for cars have long been among the worst-performing businesses. For decades steel has

been fragmented, financially weak, and plagued by over-supply. Suppliers of coal and iron ore and

customers such as carmakers were far stronger than steelmakers and dictated terms. Not surprisingly,

each downturn sent waves of companies to the wall.

Many steel execs thought Mittal was deluded as they watched him snap up distressed mills from Trinidad

to Kazakhstan. But through the years, Mittal patiently perfected his techniques of reviving plants by

making quick capital injections, dispatching emergency teams of managers to stabilize factories, and

exploiting the efficiencies in purchasing and expertise that come with an expanding network of mills. The

global market has favored Mittal, too. A doubling of steel prices in the last year thanks to a strong worldeconomy and insatiable demand from China is now making him look like a genius.

Still, it took the ISG deal to truly vindicate Mittal's vision. We need much larger companies, healthier

companies. They will bring sustainability to the industry, says the soft-spoken steel mogul in his modest

offices on London's Berkeley Square. What I am hoping is for consolidation to continue. There's

certainly room for more: Even after acquiring ISG, Mittal will have just 5% of the 1 billion metric ton

world market for steel.

Questions linger about the long-term viability of his strategy, which depends on success in the U.S. And on

the group's ability to thrive even in a downturn. What's more, Mittal will have to spend about $3 billion

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over the next five years to upgrade and maintain his aging plants around the world. Yet the massive deal is

a triumph for Mittal, who has come a long way since his birth in the Sadulpur district of India's

Rajasthan state in 1950. his father started a steel business in Calcutta decades ago. Mittal set up his own

Indian minimill in 1971. But then the eldest son struck out on his own, setting up a small mill in Indonesia

in 1975. on that tiny foundation, mittal has built an empire spanning 14 countries.

With the news of the ISG deal, Mittal's net worth has soared to around $22 billion. A resident of London

since 1995, the magnate has become a British tabloid staple. Mittal is said to have paid $130 million for a

mansion in London's West End, and spent millions on the nuptials of his only daughter a six-day affair

that included a party at Versailles for 1,500 guests.

Top of the Heap

Now Mittal is ready to make his name in the U.S. Ispat already has a presence stateside through its $1.2

billion acquisition of Inland Steel Co. in 1998. overnight the ISG deal catapults Mittal from a bit player to

the top of the heap. Inland suffered during the 2000-2002 collapse in steel prices, but with a bigger base

Mittal may be able to wring out more efficiencies, as he has done in other parts of the globe. Industry

insiders wonder, though, whether he will be able to realize the huge savings at ISG that he is accustomed

to achieving in emerging markets. ISG already has gone through a rigorous cost-cutting exercise under

Ross, who bought bankrupt companies and offloaded their retiree liabilities onto the government.Mittal declined to discuss his plans for ISG in detail, citing the risk of antitrust action. But a source close

to the company says Mittal executives figure more than $1 billion a year in cost savings and revenue gains

can still be found. Mittal wants to integrate his eight U.S. Mills mostly clustered around the Great Lakes

to mine regional economies of scale, a formula he's applying in Eastern Europe as well. By running the

facilities as a single unit, he seeks to extract better better terms from suppliers of iron ore, coal, and

electricity. And with the plants no longer competing against each other for customers, Mittal should be

able to negotiate better prices and guarantee clients a stable source of supply.

Our customers and suppliers are very happy that we are consolidating the business in the U.S. This kind

of merger sees strong and financially healthy companies emerging, says Mittal. The new Mittal Steel Co.

will have about 40% of the U.S. Market for flat-rolled steel used in autos. The industry will have more

pricing power over autos than it has had in decades, Michael F. Gambardella, an analyst at J.P. MorganChase & Co. in New York. Gambardella thinks Washington will welcome more concentration in the

industry because it will reduce the need for government intervention to protect U.S. Steel companies from

imports.

ISG's plants are hardly state-of-the art. The company logged margins of 8.6% for the first nine months of

2004, compared with a combined 27.5% at Mittal's Ispat and LNM. According to a source close to the

deal, Ross hasn't made much headway in integrating his steel plants, and faced major capital outlays for

computer systems and coking batteries, among other things . Those challenges influenced Ross's decision

to sell. It would take very many years to approach what they had, and at the end of the day we would still

be in an inferior position, says Ross.

Upgrading ISG looks relatively easy to Mittal and his execs. After all, they often performed major surgery

on the plants they acquired in emerging markets. The changes being wrought on the polish plants

purchased in March are prime examples of the Mittal way. With tens of thousands of jobs at stake,

Warsaw looked for a deal with someone who could make the old beasts work. Mittal beat out U.S. Steel

Corp., bidding $351 million for a controlling stake in Polskie Huty Stali, a package of four separate

companies close to bankruptcy. As part of the deal, Mittal agreed to take on $1.27 billion in debt and

pledged about $770 million in fresh capital.

Then it was time to apply the time-tested Mittal method. A 15-strong SWAT team, many of them Indian,

was dispatched to Silesia. Led by K.A.P.Singh, a veteran of the Indian state steel industry who had already

worked for Mittal in Mexico and the Czech Republic, the team's first priority was to stabilize the patient.

The polish plants weren't even generating enough cash to pay for supplies or employee benefits. Dunning

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letters arrived every day. As agreed, Ispat injected about $100 million in emergency capital.

Then new Chief Financial Officer Augustine Kochuparampil began calling on angry suppliers to regain

their confidence including the gas company, which was threatening to turn off the taps. One by one he

won them over by promptly paying fresh invoices and working out an installment plan to whittle down the

mountain of back debt. Kochuparampil also moved quickly to put an end to the barter arrangements by

which the company was selling some 70% of its output. Such deals produce no cash, give most of the

profits to a welter of middlemen, and breed corruption. The solution was simple: no noncash transactions

permitted without the CFO's signature.

Mixed Reviews

Meanwhile, Sanjoy Mitra, director of sales and marketing, is sharpening pricing tactics, identifying new

customers, and tilting the product mix toward higher-margin goods like cold-rolled and galvanized steel.

He's melding the Poland sales operation with those of Mittal's Czech plants so the two outfits won't

compete. Plant staff will be reduced to 10,000 from 14,500 through a combination of buyouts and attrition.

Workers give the changes mixed reviews. At least we are being paid on time, says Slawomir Lekszton, a

foreman at the Dabrowa plant. But he says the pay about $900 a month is poor compared with Mittal

plants in Germany and France: This is the [European Union], not Kazakhstan.

Senior managers like Singh are the first to admit that the Mittal method is based mostly on commonsense

business practices. Indians don't need to teach the poles and the Czechs how to make steel. Says Singh:

What we can bring is management knowhow in commercial areas. Mr. Mittal knows the world market as

no one else. The steel king plays a very hands-on role in these turnarounds. Malay Mukherjee, Mittal's

longtime chief operating officer, says his boss meets with hundreds of managers at the plants he buys to

figure out who the real leaders are. Mittal also takes a close interest in figuring out the optimum mix for

plants. Indeed, the Ploish operation is profitable just eight months after being acquired, earning $121

million a month before interest, depreciation, and taxes, according to a Mittal exec.

While the turnaround in Eastern Europe has required little capital up to now, major spending lies ahead.

Mittal's plants in poland and the Czech Republic turn out relatively low-end steel used for construction

and highway barriers not up to spec for the more demanding auto and white-goods industries. To retool

them, mittal will have to spend hundreds of millions. But he figures that with Poland and the CzechRepublic finally in the EU, their economies will gradually catch up with the West, leading steel

consumption to soar.

Mittal has built his career on spotting such opportunities. He recalls his 10 years in Indonesia as

energizing. The economy was wide open, and he learned to produce at low cost. His next stop was

Trinidad, where he took control of a state-owned plant in 1989. that led to purchases in Mexico and

Canada. Tehn came Kazakhstan in 1995. The plant was a notorious pariah where the workers were paid

in scrip. But nearly a decade and a lot of sweat equity later, he has a large, profitable 5 million-ton plant.

No one would have believed the story if they hadn't been around, says Christoper Beauman, a banker at

the European Bank for Reconstruction & Development in London who helped finance Mittal's work at

steel plants in Kazakhstan and Romania. The Kazakhstan operation was hit by misfortune on Dec.5, when

an explosion in a company-owned coal mine killed 23 workers. Mittal rushed to the scene to offer his

condolences.

One of Mittal's biggest challenges is to make the empire work together. A key part of meeting the

challenge is Mittal himself. Both associates and rivals give him high marks for determination and an

elephant-like memory. During the due diligence process in the Czech Republic, the manager of a rolling

mill gave a wildly optimistic assessment of the unit's capacity. When Mittal visited later as the owner, he

surprised the man by demanding to know how close he was to achieving that target.

Mittal knows how to pool knowledge and resources. Each Monday managers worldwide have a conference

call to hash over the world market and report on performance. If one area is short of iron ore or coal, for

example, supplies can be diverted from elsewhere. The group also locates export markets for production

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that is in surplus in its home region. Another advantage: Mittal's group controls 40% of its iron ore

supplies and is self-sufficient in coke, a big edge when these materials are not available at reasonable

prices. Frantisek Chowaniec, the Mittal executive who overseas the Czech and Polish operations,

estimates that being part of the group slashes his input costs by 10%. This industry also has pockets of

excellence around the world. The Romanians are very advanced in blast-furnace technology; the Poles get

top grades for manufacturing coke. Mittal has brought in an ex-McKinsey consultant, Bill Scotting, to

make sure such insights are exploited throughout his companies.

Investors will now find it easier to put their money alongside Mittal's ,whose holdings will be listedon the

New York Stock Exchange. Ispat, traded on the Amsterdam Stock Exchange and the NYSE, groups most

of the family's Western operations, accounting for about 40% of revenues. The stock price has gone from

$7 a year ago to more than $36 today. More profitable LNM Holdings, a private company, has the non-

Western assets. In a complex deal, Ispat will acquire control of LNM, and the resulting Mittal Steel Co.

will acquire ISG in a 50-50 cash and shares transaction. Mittal's eldest son, Aditya, will be president and

chief financial officer of the group. The 28-year-old Wharton School graduate had a big hand in

negotiating the ISG deal.

Mittal will doubtless keep seeking ways to expand. Dolle of Arcelor thinks that in 10 years the industry

will be dominated by four or five majors. The candidates include Mittal, Arcelor, Shanghai Baosteel

Group, aJapanese entry, and possibly, posco in South Korea.

Mittal still has holes to fill in his portfolio. The big priority is China a tough nut to crack. He recentlylaunched a $100 million finished steel operation Liaoning province. But acquisitions are getting more

competitive. A bid by U.S. Steel drove up the price of the Polish plants, and Mittal lost out to the

Pittsburg-based rival on a plant that he coveted in Slovakia in 2000.

And while Mittal has low costs, big capital commitments could be a stretch during a downurn. In the last

steel slump his companies struggled. Mittal figures that consolidation and a focus on profits rather than

volume in the industry will head off supply gluts in the next crunch. Others, including some Mittal

insiders, think the next downturn could be vicious. A wild card is China, which in the last decade has

added capacity equal to 90% of the eurozone.

Still, even competitors concede that, compared with just four years ago, Mittal now has a broader-based

group with margins that are the envy of the industry. When Mittal vows to do a deal, his rivals have

learned to listen. He's a manof his word, says Daniel R. DiMicco, CEO of Charlotte (N.C.)-based NucorCorp. And Lakshmi Mittal hasn't finished yet.

Source: Copyright 2004 The McGraw Hill Companies, Inc. All rights reserved. Stanley Reed with Michael

Arudt, The Raja of Steel, Businessweek, December 20, 2004,pp.50-52